MANAGEMENT

CONTROL SYSTEM

3rd Meeting
Strategic Planning

By: Natalis Christian, SE., MM.

Management Control System - TA Genap 1516
 Learning Objective
 Able to understand differentiation and
relation between strategy formulation and
strategic planning.
 Able to describe benefit and limitation of
strategic planning.
 Able to describe technique for analyzing
and deciding on proposed new programs.
 Able to describe technique that are useful
in analyze ongoing programs.
 Able to explain several steps in strategic
planning process.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 2
 3rd Meeting
Strategic Planning

NATURE OF
STRATEGIC PLANNING

Management Control System - TA Genap 1516

Nature of Strategic Planning
 Strategic Plan: a formal statement of plans.
 Strategic Planning: the process of preparing &
revising the statement.

Strategic Planning is the process of deciding on

the programs that the organization will undertake
and on the approximate amount of resources that
will be allocated to each programs over the next
several years.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 4
Relation to Strategy Formulation
 Strategy formulation vs Strategic planning?
 Strategy formulation: the process of deciding
new strategies.
 Strategic planning: the process of deciding
how to implement the strategies.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 5
 3rd Meeting
Strategic Planning

BENEFIT AND LIMITATION

OF
STRATEGIC PLANNING

Management Control System - TA Genap 1516

Benefits of Strategic Planning
Can give the organization:
1. A framework for developing the annual
budget.
2. A management development tool.
3. A mechanism to force managers to think
long term.
4. A means of aligning managers with the long-
term strategies of the company.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 7
Benefits of Strategic Planning
Strategic Option A

Strategic Option B
Budgeting
Strategic Option C
Strategic Option D

Strategic Option A
Strategic
Strategic Option B Option A
Budgeting
Strategic Option C Budgeting
Strategic
Strategic Option D Option C

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 8
Limitations of Strategic Planning
1. A danger that planning can end up becoming a
“form-filling”, bureaucratic exercise, devoid of
strategic thinking.
2. An organization may create a large strategic
planning department & delegate the preparation
of strategic plan to that staff department.
3. Strategic planning is time consuming &
expensive.
A formal strategic planning process is not needed
in a small, relatively stable organization. It is not
worthwhile in organization that can not make
reliable estimation about the future.
Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 9
 3rd Meeting
Strategic Planning

ANALYZING PROPOSED
NEW PROGRAM

Management Control System - TA Genap 1516

Analyzing Proposed New Programs
 Ideas for new programs can originate
anywhere in the organization.
 Proposal for programs are essentially
either reactive or proactive.
 Adoption of new programs should be
viewed as a series of decisions, and not
a single decision.
 Capital investment analysis:
 Net present value of the project
 Internal Rate of Return

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 11
The Net Present Value Method
Net present value is the difference between the
present value of the cash inflows and outflows
associated with a project.
NPV = P – I
where:
P = the present value of the project’s future cash
inflows
I = the present value of the project’s cost (usually
the initial outlay)
Decision Criteria:
If NPV > 0, this indicates:
1. The initial investment has been recovered
2. The required rate of return has been recovered
Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 12
The Net Present Value Method
The present value techniques are not used in
analyzing the proposals for the project if:
 The proposal is not attractive enough then it is
not necessary to calculate the net present value.
 The estimates involved in the project are so
uncertain that making present value calculations
is not worth the effort.
 The present value approach concentrates on the
increasing profit of the firm. But some projects
can be implemented to boost employee morale
and to improve the company’s image or for
safety reasons.
Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 13
Internal Rate of Return
The internal rate of return (IRR) is the interest
rate that sets the project’s NPV at zero. Thus, P =
I for the IRR.

Decision Criteria:
If the IRR > Cost of Capital, the project should be accepted.
If the IRR = Cost of Capital, acceptance or rejection is equal.
If the IRR < Cost of Capital, the project should be rejected.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 14
Capital Investment Analysis
There are two major differences between net present value
and the internal rate of return:
 NPV assumes cash inflows are reinvested at the required rate of
return, whereas the IRR method assumes that the inflows are
reinvested at the internal rate of return.
 NPV measures the profitability of a project in absolute dollars,
whereas the IRR method measures it as a percentage.
Organizations must look into the following issues before
implementing capital expenditure evaluation systems:
 Rules
 Avoiding Manipulations
 Acquaintance with Planning Models
 Organizing for analyzing
Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 15
 3rd Meeting
Strategic Planning

ANALYZING
ONGOING PROGRAM

Management Control System - TA Genap 1516

Analyzing Ongoing Programs
Several analytical techniques
can aid in this process.
 Value Chain Analysis
 Activity Based Costing (ABC)

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 17
 Value Chain Analysis
 The value chain for any firm is the linked set of
value creating activities of which it is a part, from
acquiring basic raw materials for component
suppliers to making the ultimate end-use
products & delivering it to final consumers.
 Three potentially useful areas:
1. Linkages with suppliers.
2. Linkages with customers.
3. Process linkages within the value chain of the firm.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 18
Process Linkages with the
Value Chain of the Firm
 Value chain analysis explicitly recognizes the fact
that the individual value activities within the firm
are not independent but rather are
interdependent.
 Improving efficiency throughout the process
linkages within the value chain.
 Move materials from vendors, through production, & to
the customer at the lowest cost, in the shortest time, &
of acceptable quality.
 Reducing the number of separate parts & increasing
their ease of manufacture.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 19
Process Linkages with the
Value Chain of the Firm
 Improving efficiency of every activity within the
chain.
 Efficiency of the inward portion
Ex: reducing the number of vendors, having a computer
system place orders automatically.
 Efficiency of the production portion
Ex: increased automation, better production control
system.
 Efficiency of the outward portion
Ex: having customer place order electronically, changing
the location of warehouse & channel of distribution

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 20
Activity-Based Costing
 The cost center is activity.
 The basis of allocation is cost driver.
 ABC when use as the strategic planning process,
may provide useful insight. For examples:
 It may show that complex products with many separate
parts have higher design & production costs than simpler
products.
 Products with low volume have higher unit cost than high
volume products.
 Those information may lead changes in strategies.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 21
 3rd Meeting
Strategic Planning

STRATEGIC PLANNNING
PROCESS

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Strategic Planning Process
1. Reviewing & updating the strategic plan
from last year.
2. Deciding on assumptions & guidelines.
3. First iteration of the new strategic plan.
4. Analysis
5. Second iteration of the new strategic
plan.
6. Review & approval.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 23
Reviewing & updating the
strategic plan from last year
 Reviewing and updating takes place every year
when the strategic plan is prepared, depending
on the decisions the management takes.
 There is no fixed time limit set for this review.
 Updating is usually taken up by the planning
staff.
 The management is involved, only if there are
uncertainties or ambiguities in the program
decisions.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 24
Deciding on
assumptions & guidelines
 This step involves making broad assumptions about
growth in the gross domestic product, cyclical
movements, the rate of general inflation, labor rates,
prices of important raw materials, selling prices, market
conditions, and the government legislation, in each of
the countries in which the company operates.
 This process of updating has implications on revenues,
expenses and cash flows of the existing operating
facilities.
 This updating provides a rough estimation for the senior
management to decide about the key guidelines that are
to be observed in planning and for designing of these
methods for achieving these objectives.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 25
First iteration of the
new strategic plan.
 After the assumptions and guidelines have been
framed, the business units prepare the first
iteration of the strategic plan.
 During the preparatory stage, employees from the
headquarters visit the concerned business unit to
find out whether the guidelines, assumptions and
instructions are being followed.
 The completed strategic plan consists of income
statements (inventory, accounts receivable) and
other balance sheet items (sales and production, of
expenditures of the plant and other capital
acquisitions).

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 26
Analysis
 Planning gaps occur when the individual
business unit plans do not work towards
achieving corporate objectives.
 The best way to close these gaps is by:
 Identifying the areas where the business
unit plan can be improved on par with the
corporate plan.
 Making acquisitions.
 Reviewing the corporate objectives.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 27
Second iteration of
the new strategic plan.
 Sometimes, the guidelines may be
changed, and this leads to a change in the
overall plans of all the business units.
 Technically the revision is simple enough,
but implementing such changes within the
organization it difficult and time-
consuming, because difficult decisions have
to be made.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 28
Review & approval.
 The revised plan is discussed with the senior
corporate officials. It can also be presented
in the meeting of the board of directors, and
the final approval comes from the chief
executive officer.
 The approval process should be completed
before beginning the budget preparation
process, as strategic planning is an
important input for budget preparation.

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 29
QUIZ
01. NPV Calculation
Polson Company has developed a new cell phone that is expected to
generate an annual revenue of $750,000. Necessary production
equipment would cost $800,000 and can be sold in five years for
$100,000. In addition, working capital is expected to increase by
$100,000 and is expected to be recovered at the end of five years.
Annual operating expenses are expected to be $450,000. The required
rate of return is 12 percent.

02. IRR Calculation

A project requires a $240,000 investment and will return $99,900 at the
end of each of the next three years. What is the IRR?

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 30
ANSWERS
QUESTION 01
Step 1. Cash Flow Identification
Year Item Cash Flow
0 Equipment $-800,000
Working capital -100,000
Total $-900,000

1-4 Revenues $ 750,000

Operating expenses -450,000
Total $ 300,000

5 Revenues $ 750,000
Operating expenses -450,000
Salvage 100,000
Recovery of working capital 100,000
Total $ 500,000

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 31
ANSWERS
QUESTION 01
Step 2A. NPV Analysis
Year Cash Flow Discount Factor Present Value
0 $-900,000 1.000 $-900,000
Present Value
1 300,000 of $1 0.893 267,900
2 300,000 0.797 239,100
3 300,000 0.712 213,600
4 300,000 0.636 190,800
5 500,000 0.567 283,500
Net present value $ 294,900

Step 2B. NPV Analysis

Year Cash Flow Discount Factor Present Value
0 $-900,000 1.000 $-900,000
Present Value of
1-4 300,000
an Annuity of Value
$1
3.037 911,100
Present
5 500,000 of $1 0.567 283,500
Net present value $ 294,600
Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 32
ANSWERS
QUESTION 02
Trial & Error
$240,000 = $99,900(df)
$240,000 / $99,400 = 2.402
i = 12%

Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 33
 THE END

Management Control System - TA Genap 1516